9 Reasons Why You Should Invest in ULIP

Table of Content

1. What is ULIP?

2. Reasons Why You Should Invest in ULIP Now

3. Best Time to Invest in ULIPs for Maximum Benefits

4. Conclusion

5. FAQs on Reasons Why You Should Invest in ULIP

What is ULIP?

A ULIP is an investment avenue which offers both the benefits of life insurance and market-linked investments in a single plan. The premium paid is divided into two parts. One portion offers life insurance coverage, while the other portion can be invested in equity, debt, or balanced funds, depending on your risk tolerance and financial goals.

Investing in ULIPs is ideal for long-term financial planning, enabling you to build wealth while securing your family’s financial goals. They offer the flexibility of adjusting your premium terms, switching funds to balance your investment or adding riders to meet your changing financial needs. 

Reasons Why You Should Invest in ULIP Now

Apart from providing dual benefits of securing your future financial needs and providing returns from market-linked investments, ULIPs also provide tax benefits, diversify fund choices and the power of compounding. Here are the reasons why you should invest in ULIPs: 

1. Dual Benefits

Investing in ULIPs will help you get dual benefits of life coverage and investment returns, depending on market conditions. This makes it a comprehensive financial tool for long-term returns and benefits to meet your financial objectives. 

A percentage of premium provides life insurance protection for your family, ensuring financial security in case of your untimely demise. The remaining premium is invested in equity, debt or hybrid funds, depending on ability and willingness to take risks. 

This unique structure of investment and financial protection enables you to safeguard your family’s future while working towards wealth creation opportunities. 

2. Tax Benefits

ULIPs provide attractive tax benefits on both premium payments and returns, making them highly tax-efficient investment products. The premium you pay for a ULIP is subject to deduction under Section 80C* up to ₹1.5 lakh every financial year. 

If a policy is purchased after April 1, 2012, the maturity amount received upon the policyholder's death is exempt from tax under Section 10(10D)*. Additionally, if the annual premium is less than ₹2.5 lakh and the policy is purchased on or after February 1, 2021, then the maturity benefits are tax-exempt. However, the annual premium must not exceed 10% of the sum insured. 

Apart from these benefits, if you decide to withdraw the ULIP amount before completing the 5-year lock-in period, then the entire amount is taxable. These tax advantages apply to individual taxpayers and are subject to amendments in the prevailing Indian tax laws, and are reasons why you should invest in ULIPs. 

3. Flexible Fund Switch

Investing in ULIPs provides the benefit of fund switching to maximise your investments during the policy term. Also, policyholders get better control of their investment strategy and meet their financial objectives more seamlessly. 

You can choose to move your investments between equity, debt or balanced (hybrid) funds based on your financial goals, willingness to take risk, or current market conditions. Most insurers allow multiple fund switches in a year without any charges. 

With this feature, you can shift to debt funds during uncertain periods or equity funds during the market’s growth phases. Therefore, investing in ULIPs enables you to respond proactively to market volatility and maximise your returns while protecting your investment over the long run. 

4. Easy Top-Up Option

You can make an additional investment above your regular premium when you buy a ULIP. This feature enables you to increase your investment whenever your income grows or your financial requirements change, making it one of the reasons why you should invest in ULIPs. 

You can choose to invest the top-up premium amount in any choice of funds to enhance your wealth creation without purchasing a new policy. Top-up premiums also qualify for tax benefits under Section 80C* and 10(10D)*, provided the premium-to-sum-assured ratio meets the required conditions. 

Most ULIPs specify the minimum and maximum premium top-up limit. Hence, it is better to review the policy documents carefully for more information on the easy top-up option. 

5. Diverse Fund Choices

ULIPs are single policies offering diversified fund choices. This enables the investors to customise their portfolios according to risk tolerance, investment horizon, and financial goals. With this flexibility, you can ensure your investment strategy aligns with your goals while adapting to changing market conditions. 

Here are the key ULIP fund types where you can invest a portion of the premium you are paying:

• Equity Funds: Invest primarily in stocks or equity-linked instruments, ideal for high-risk investors with long-term growth ambitions. 

• Debt Funds: Focus on fixed-income securities like bonds and government instruments. They are suitable for low-risk investors who want investment stability. 

• Balanced (Hybrid) Funds: Maintains a balance between investing in equity and debt funds, making it suitable for moderate risk-takers wanting both growth and stability. 

• Money Market Funds: Short-term debt investments in treasury bills or certificates of deposit. They are suitable for low-risk takers with short-term needs.

6. The Power of Compounding

One of the main reasons why you should invest in ULIP is the power of compounding. Compounding is the process by which your investments are reinvested, creating a snowball effect. It makes your money grow not only on the initial invested amount but also on interest and gains earned over time. 

Since ULIPs are long term investment plans, they allow compounding to work more effectively when the policy is held for longer. The reinvested amounts begin to generate their returns, eventually increasing the invested corpus. Furthermore, this can significantly boost your fund value, especially when you keep withdrawals or switches to a minimum. 

For example, an investment of ₹1 lakh growing at 10% annually can double in about 7 years through the power of compounding. 

7. Early Bird Advantages

If you begin investing early in a ULIP, you can lock in lower premium rates. This is because life insurance costs are generally determined by age and health at the time of purchase. Moreover, younger investors benefit from a longer investment horizon, enabling greater compounding and market-linked growth over time. 

While ULIPs have a 5-year lock-in period, starting early ensures you can enjoy a higher return in later years when your investments mature and market exposures stabilise. Also, you can invest systematically, which will help you achieve your financial objectives. 

Therefore, with a single premium providing both life cover and investment benefits, early investment in ULIPs becomes even more cost-effective, making it a viable reason why you should invest in ULIP. 

8. Flexibility Within the 5-Year Lock-in Period

ULIPs have a mandatory 5-year lock-in period, during which investors cannot withdraw or surrender the policy. This lock-in period will encourage disciplined, long-term investment, helping you to fulfil your financial goals. You must claim tax benefits under Section 80C and Section 10(10D)* of the Income Tax Act.

One of the major flexibilities of these investment avenues, making it a strong reason why you should invest in ULIP, is that even during the lock-in period, you can switch funds without extra charges. Partial withdrawals are only allowed once the lock-in period is over, unless otherwise specified by the insurer. However, there can be certain limits, such as a percentage of the fund value or a fixed number of free withdrawals per year. 

9. Potential for Long-Term Wealth Growth

ULIPs invest in diversified funds such as equity, debt or hybrid options, offering the potential for higher returns compared to traditional insurance products. Market conditions determine whether returns are available, making ULIPs suitable for long-term wealth creation. 

Since you can switch between different funds in a ULIP, investors can build their portfolios based on market conditions or risk tolerance. These investments are managed by professional fund managers who ensure their optimised performance for better returns in the long run. Furthermore, you will get the compounding effect of the investment once the lock-in period is over and the charges are gradually reduced. 

Best Time to Invest in ULIPs for Maximum Benefits

The best time to start a ULIP is in your 20s or early 30s, when premiums are lower, life cover is easier to secure, and rates remain fixed for the entire policy term. Beginning early gives you a longer investment horizon, allowing the power of compounding to significantly boost your fund value beyond the 5-year lock-in. 

Early investments also make goal-based planning, such as retirement, child education, or wealth creation, more achievable. ULIPs are designed for long-term growth, so delaying your decision can reduce potential returns. Starting now maximises both protection and market-linked growth, making this a key reason why you should invest in ULIP.

Conclusion

A ULIP uniquely combines life insurance protection with market-linked investment, making it a versatile tool for long-term financial planning. It offers benefits such as flexible fund switching, diverse investment options, compounding for wealth growth, and the ability to increase investments over time. 

Starting early helps secure lower premiums and maximise returns, while tax benefits under Sections 80C* and 10(10D)* add to its appeal. Professionally managed by expert fund managers, ULIPs provide transparency and credibility. If you seek a secure, flexible, and growth-oriented plan, these advantages clearly show why you should invest in ULIP.

FAQs on Reasons Why You Should Invest in ULIP

1. Why should one invest in ULIP?

A ULIP offers the dual benefit of life insurance protection and market-linked investments in a single plan. It provides flexibility through fund switching, diverse investment options, and the ability to top-up contributions over time. With the tax benefits under Sections 80C and 10(10D), ULIPs support long-term wealth creation while fulfilling your financial objectives. 

2. Is ULIP better than FD?

ULIPs and fixed deposits (FDs) serve different financial purposes for a person. FDs offer fixed returns with low risk, while ULIPs provide life insurance protection and returns that are affected by market fluctuations, making them slightly riskier. So, FDs are ideal for short-term, low-risk savings, and ULIPs are better for long-term goals and wealth creation. Your choice depends on your financial objectives. 

3. Is ULIP a good option for first-time investors?

Yes, ULIP can be a good choice for first-time investors who want to protect their financial stability and grow wealth simultaneously. They provide flexibility in choosing funds based on individual risk appetite and provide tax benefits. With professional fund management, ULIPs help you gradually understand market-linked investments while ensuring life cover, helping to build financial discipline. 

4. Can ULIPs help in planning for future life goals like child education or retirement?

Yes, you can use ULIPs to plan for long-term financial goals. These goals can include funding your child's education or creating a retirement corpus. The combination helps you grow wealth steadily in the long run. The flexibility to switch funds ensures alignment with changing financial priorities and market conditions.    

5. Can I customise my ULIP based on my risk profile?

Yes, ULIPs offer flexibility to customise your investment according to your risk appetite (high, moderate, or low). You can choose to invest in equity, debt or hybrid funds and switch between the funds if market conditions change. This adaptability ensures your ULIP remains aligned with your financial goals and comfort with market risk over time.